The DMART story

The DMART storyBy : SHUBHAM moondharaAbout DMARTAn Entrepreneurs journeyStarted in the year 2000 by renowned stock broker and investor RK DamaniOwned and operated by Avenue Supermarts Ltd where Damani owns a 52% stakeOperates stores in over 75 locations in indiaStore size varying from 5000 to 40000 SqftSeeks to be a one-stop shopping destination for the entire family, meeting all their daily household needsOnly Organized retailer in India to post profits YoY since inceptionNot shut any store till date

MISSIONTo be the lowest price retailer In the area of operation/region/citySource: Probe report & ETNetwork Geographical Presence

Predominant in Western and South-Western IndiaPresent in 77 locations across Maharashtra, Gujarat, Andhra Pradesh and KarnatakaMaharashtra(45)Gujarat(18)Andhra Pradesh(6)Karnataka(4)MumbaiAhmedabadHyderabadBengaluruNavi MumbaiRajkotThaneBarodaPuneSuratSolapurAnandSangliGandhinagarKolhapurValsadAmravatiJalgaonIchalkaranjiKarad

Source: Company website3 Understanding the DMART Strategy

Ownership of Real EstateDMART owns more than 85% of its stores ( Only 7 out of 62 stores on lease in FY13)For retailers, rent cost is 5-8% of the total sales. Hence, bottom line is shielded from this cost burdenNo Rental CostLocationNone of the stores in MallsLocations surrounded by residential societiesSupported by the fact that DMART owns the expensive real estate Real Estate StrategySavings on high maintenance charges and exorbitant rentsEasy access to dense catchmentCAM charges and CatchmentSource: Probe report & ETSKU count(units)SKU TypeDMARTSpencersFMCG Food23002200FMCG Non Food21002700Fresh & Bakery18004500Apparel450015000GM35005000Total~15000~30000Product DepthVendor Management( Terms of Trade)Payments to vendors in 11-21 days( much lower than normal payment cycles for other retailers)FMCG/F&D- 24 hours payment by RTGSNo return to vendor concept, damages and dump are covered in the terms of tradeInventory holding period is only 28 daysSKU depth carried by DMART is less and its strategy is to provide limited variety and hence stock the fastest selling SKUs only

Faster payment to vendors helps negotiating much higher margins which it can pass on to consumers as discounts

Prevents stock outs( empty shelves) as vendors prefer supplying to DMART due to superior payment terms and conditions Merchandising

Source: MIS and field estimates* DMART doesnt hold Fresh( Meat, Sea Food etc. ) and BakeryNeed to check Spencers SKU numbers6 Pricing DMARTs USPBlanket store off policy Depending on competition in each catchment: Minimum X% discount on all SKUs in storeFMCG/StaplesCategory wise blanket off policyFor e.g. All biscuit SKUs will have minimum X% off in one store, All juices will have minimum Y% off in another storeTop SKUs bucket This is analogous to our KVIs and the SKUs are anywhere between 275-400.These need to be the cheapest for that catchment and become clear competition killers.Entry/Medium level range of SKUs are displayed. Lowest Prices among competition or match itGeneral MerchandiseEntry price across categories to be the lowest amongst competition for that catchmentAll in-house brands (No external brands) and sold at price on the tags (and store blanket discount policy applied at POS)

ApparelsSource: Field estimatesStrategyImpactDown to earth storesCheck on ExpensesDMART operates no frill storesInexpensive fixtures and low expenditure on lighting helps DMART saves cost and improve profitability.Customers are attracted by the low prices which are clearly projected to themVery narrow aisles , No travellators (Lifts can take at max one trolley), Poor directional signage and Poor store hygiene

No structured planogramming: Top three shelves of all retail floor bays are used for warehousing & Very poor merchandising when compared to all retail players in India

Single row checkouts

Free parking (but not adequate parking)Other Important Observations Store Operations

Marketing Communication

Festive PromotionsSchool Stationery PromotionsNo promotion cycles/ theme festivals calendarVery ad hoc newspaper ads Aggressive on hoardings in crowded places (Bus stops/Circle junctions)Simple yet functional in-store SEL signage, floor stack signagesDMART has cut its promotion spend by 30-40% in the last couple of years People Pillars of DMARTs strengthPeople No Educational Qualification bar on store staff at any levelNo structured employee development program in placeLow attrition because of lower employability owing to poor educational qualificationsAverage CSA salary : Rs 6600Cashiers get Rs. 20 bonus per day (for zero shortages) and shortages are debited off from respective bonus pool itselfStore Personnel- Hierarchy Source: Field observations and interviews Inside DMART Apparel Placement

Apparel section is cluttered with stocks piled up basis the price points ( DMART does heavy volumes in apparel )The look and feel of the entire space is very sub standard and does not gel well with a customer that values Quality or ExperienceHowever, a price sensitive customers purchase decision is based solely on the extremely low price of the apparel

Inside DMART GM Placement

Merchandise is stacked without any specific allocation or location.Dumped on the floor and the customer would need to pick them up from thereCartons placed on the top of racks. Tarnishes the look and feel of the store which looks like a godown Customers have to skim through the merchandise to find out the best in shape productsDamaged/Old looking merchandise is sold at deep discounts

Inside DMART FMCG & Staples

Trays not used to stack FMCG products like Ketchups, Breakfast SKUs, Aata etc. Saves cost and impacts the overall look of the storeFMCG stacked up in a more organized fashion as compared to GM or Apparel

Inside DMART Pricing

Value Proposition delivery

Clear Price Off/ MRP Reduction communicated to the customerSWOT AnalysisSTRENGTHS Strong Image as a discount retail storeStrong Value proposition of Lowest Prices Better Vendor negotiation and margin terms Ownership of Real estate- Strong cost advantage Located in prime residential localities in citiesLow debt on the books and hence immense scope to leverageWEAKNESSCurrent model poses a challenge in scaling up and aiming for a pan India presence- Capital availability Lesser range of SKUs Smaller stores are not tidy with poor planogramming and store layoutsOPPORTUNITIES 6-7% Organized retail Penetration in India: Immense scope of scaling up and building a large network Joint Venture with a global retail giant to further improve the backend supply chain structure Entry into categories like consumer durables and IT Brand Extension: Target high premium segment by opening DMART premium outletsTHREATS Super competitive landscape with competition from local kirana shops on one side and national retailers like Big Bazaar, Reliance , MORE, Spencers etc Many players fighting on price and this might not serve to be a USP going forward Increasing Potential compliance norms E retail penetration to increaseSWOT Financials( DMART)Source: MCA Filing Figures in Rs croreFY14FY13FY12 Gross Sales4996100.0%3558100.0%2409100.0% Less VAT3266.5%2326.5%1606.6% Net Sales467093.5%332693.5%224993.4% Other Op Income110.2%80.2%50.2% Revenue from operations468193.7%333493.7%225493.6% Total Commercial Income68113.6%46713.1%31313.0% Store Expenses Rent70.1%60.2%40.2% Repairs & Maintenance310.6%220.6%70.3% Utilities430.9%330.9%241.0% Store Manpower Cost911.8%591.7%381.6% Miscellaneous expenses581.2%411.2%472.0% Total Store Overheads2304.6%1614.5%1205.0% Store Contribution4519.0%3068.6%1938.0% Employees & Other Expenses851.7%681.9%391.6% Other Format Expenses130.3%100.3%190.8% EBITDA3537.1%2286.4%1355.6% Financials( Comparison with Spencers)FY14DMARTSpencers(HM) Figures in Rs croreFY14FY14 Gross Sales4996100.0%1020100.0% Less VAT3266.5%777.5% Net Sales467093.5%94592.6% Other Op Income110.2%383.7% Revenue from operations468193.7%1059103.8% Rupee Gross Margin68113.6%20520.1% Rent70.1%525.1% Repairs & Maintenance310.6%20.2% Utilities430.9%212.1% Store Manpower Cost911.8%343.3% Miscellaneous expenses#210.4%545.3% Total Store Overheads1933.9%15014.7% Store Contribution4889.8%555.4% Store Contribution( without rent)4959.9%10710.5% Marketing & VM Costs Costs*370.7%181.8% DC Expenses*00.0%131.3% Employees & Other Expenses851.7%353.4% Other Format Expenses( RO Cost)130.3%202.0% CORPORATE EBITDA3537.1%-31-3.0%*Marketing , DC, Employee and Other format expenses have been taken in proportion of sales (67%)#Misc expenses includes stationery, travel, communication etc. Financials Comparative View with Spencers(FY14)FY14 ( Per Sq Ft Comparison)DMARTSpencers(HM) RGM13.6%20.2% Adjusted RGM13.6%17.9% Operational CostsRs/sqft/monthRs/sqft/month Store Man Power40.641.43 Rent3.163.80 Electricity charges19.326.31 Security charges9.87.70 Repairs & Maintenance13.52.02 Misc^0.016.25 Total Operating Costs86.3158Total Operating costs(without rent)83.294 Marketing & VM Expenses16.622.51 SCM Expenses0.015.74Costs as % NSV should not be compared as the top line is almost 5 times. Right metric for comparison would be psf costs Operating Costs/Sqft(without rent) are at par with Spencers HyperDMART has lower utility cost owing to lesser use of chillers and Bakery equipmentMarketing Expenses for Spencers are 35% more than DMART FY14DMARTSpencers(HM)Rs Cr.Rs Cr.Gross Sales49991020 Net Sales4670945 Total COGS4000807 Gross Margin670138 Operating Income10.768 Rupee Gross Margin680.7205.6 RGM %13.62%20.2% ExpensesFY14DMART% Gr. SalesSpencers HM%Gr. SalesRs Cr.Rs Cr. RGM %680.713.6%205.620.16% Shrinkage050.49% Warehouse/freight out00.70.07% House keeping charges08.30.81% Finance charges07.20.71% Consumables01.40.14% Adjusted RGM68113.6%18317.9% Operational CostsRs Cr.Rs Cr. Store Man power*911.8%33.63.30% Rent6.90.1%51.75.10% Utilities43.20.9%21.32.10% Security charges220.4%6.20.60% Repairs & Maintenance30.30.6%1.60.20% Misc^00.0%13.21.30%Total Operating Costs193.43.9%127.612.6% Financials- DiscussionParameterDMART(FY14)Spencers Hyper (FY14)CommentsNSV( Rs Cr.)46701019Primarily due to scale. While DMART operates more than 70 stores, Spencers HM runs 34Adjusted RGM%13.6%17.9%One of the lowest Gross Margins among competitors due to deep discounts in line with the lowest price propositionOperational Costs without rent (Rs/Sqft)8394Rental Cost of Rs 3.4 psf driven by their policy of owning real estate( SpencersHM rental cost is Rs 63.8 psf)Store man power cost of Rs 41 is at par witH Spencers HypersLower utility costs of Rs 19.3 psf probably on account of inferior store ambience and storage

Back end employee cost (%NSV)1.7%3.4%On absolute cost basis, DMARTs backend employee expense is ~2.4 times Spencers HMs cost. This impact is toned down due to a much higher NSVEstimated SPSF(Rs/month)21681258Top line is ~4.6 times Spencers HM . This is primarily due to lowest price proposition and superior location of storesAssumed an average store size of 25000 sqftSuggested Reasons for Strong Performance Financials- ConclusionsParameterDMARTSpencers HMRemarksAdjusted RGM(%)*13.6%17.9%DMARTs RGM% is 14.6% net of VAT on salesSPSF( Rs psf)21681258This is the major driving factor for:Higher turnoverLower % costs and resultant profitabilityOperational Costs(Rs psf)- without rent8394Comparable operation costs psf ( barring Marketing and SCM costs)Once Spencers HM gains scale, these will reduce as a % of saleSStore Contribution%(without rent)9.9%10.5%Higher Costs as %NSV due to Significantly lower toplineNon-Operational Costs2.7%8.4%Achieving scale is the only way to reduce these largely fixed costs DMART gets a ~6% advantage which bolsters its bottomlineCorporate EBITDA%(without rent)

7.2%2%Superior Top line, Very high SPSF and tight cost structure contribute to DMARTs bottomline* Adjusted RGM is adjusted for costs like consumables, shrinkage, housekeeping etc as these items seem to be accounted for in DMARTs RGMAbsolute badParityAbsolute good Catchment type and PerformanceMumbaiCatchment typeEstimated SPSFEstimated rent/sqftPowai(2)Malad westChandivaliMulund westThaneKandivali westKhargharSeawoodsPanvelVersovaKandivali EastAndheri WMira RoadDahisarKalyanKanjurmarg WNalsopara EBhayandar WVirar WKopar KhairaneVasai WNerul SanpadaAiroliKalamboliGhansoliKasarvadavaliDombivili ELegendCatchmentSPSFRent / SqftSec B + and above>1500< 40Sec B800 to 150040 to 75Sec C and below 75PuneCatchment typeEstimated SPSFEstimated rent/sqftBanerKalyani NagarChinchwadSatara RoadAundhHinjewadiNigdi KalewadiRest of MaharashtraSolapurSangliKolhapurAmravatiJalgaonIchalkaranjikaradGujaratAhmedabadBarodaSuratRajkotValsadGandhinagarAnandBangaloreHyderabadOut of the 14 locations(~20 stores) with estimated SPSF greater than 1500, 10 locations have an estimated rent of more than Rs 75 psf

These 20 stores contribute ~55% of DMARTs top line

High rentals are a big challenge for Spencers to open stores in those locations and hence unrealistic to target to achieve SPSF>2000

Spencers stated intent to not go in tier 2 or 3 towns( saturate existing markets) where estimated rental is less than 40 psfSource: Field observations and estimates21ExpansionDMART has gone through a very careful expansion till now ( keeping itself in a tight geographical footprint)Going forward , it plans to open 12-14 stores a year , all in the existing regionsIt does not intend to expand rapidly to gain a pan India presenceAs per current business model, DMART owns > 85% of the stores. In the future it might tweak the model to open stores on lease( rent)Business ModelDMART doesnt intend to enter into any partnership or joint venture with any global retail giant

Joint Venture/Acquisition Going Forward: Road Map 2 Different Players in same eco space Will CoexistParameterDMARTSpencers RemarksUnique selling PropositionLowest PriceMakes fine living affordable( Food first retailer)DMART and Spencers target different segment of customers. One those who just need the lowest prices and other who shop for the experience and look for competitive prices. While lowest price philosophy can be matched, Experience needs to be built over time and is not replicable easilyReal EstateOwnershipLease agreements(6-15 years), Rent escalationsRent cost eliminated for DMARTNo hassle of dealing with the landlordsOwning real estate can limit scalability of DMARTPeopleNo minimum requirementMinimum requirement of class 12th PassEnsures uniformity and is reflected in customer feedback about store CSAsMerchandisingSelect SKUsWide and deep range of SKUsSpencers provides its customers with wide variety and does not constrain them for choiceStore InteriorsLow frill storesBest in class fixtures and lighting In Line with our philosophy, Spencers is here to provide a unique shopping experience and offer competitive( but need not be lowest) prices.23THANK YOU